ACC101: INTRODUCTION TO ACCOUNTING CDA COLLEGE ACC101: INTRODUCTION TO ACCOUNTING Lecture 4 Lecturer: Kleanthis Zisimos

Accrual Accounting The time period principle assumes that an organization’s activities can be divided into specific time period such as a month , three month quarter or a year. Most organizations use a year as their primary accounting period and these reports are called annual financial statements. The annual reporting period is not always a calendar ending on December 31 but it can be from February 1st until 31 January and so on. Most companies thought adopt the annual period January 1st until December 31

Accrual Accounting The usual accounting process is to record transactions during an accounting period. After transactions have been recorded , several accounts in the ledger need adjustment before their balances appear in the financial statements. This need arises because internal transactions remain unrecorded. Adjustments are necessary for transactions that extend over more than one accounting period.

Accrual Accounting Adjustments are grouped into the following four types

Accrual Accounting 1.) Prepaid Expenses refer to items paid in advance. Ex. We prepaid the rent of January 2011 for 400 euro in December 2010. Journal Entry Dr Cr Rent prepaid 400 Cash 400 Rent Prepaid account is an asset of the company and goes to the balance Sheet

Accrual Accounting 2.) Accrued Expenses refer to costs that incurred in a period but are unpaid and unrecorded Ex. Salaries for 1000 euro in December 2010 are not paid and must be recorded. Journal Entry Dr Cr Salaries Expense 1000 Salaries payable 1000 Salaries payable is a liability account

Accrual Accounting 3.) Unearned Revenues refer to cash received in advance for providing products or services Ex. Consulting services 2000 euro for January 2011 are paid in advance in 2010. Journal Entry Dr Cr Cash 2000 Unearned Con. Services 2000 Unearned Con. Services account is a liability to the company

Accrual Accounting 4.) Accrued Revenues refer to revenues earned in a period that are unrecorded and not received Ex. Subscriptions receivables for 3000 euro are not yet received nor recorded in the books Journal Entry Dr Cr Accrued Subscriptions 3000 Subscriptions Rec revenue 3000 Accrued Subscriptions account is an asset to the company

Accrual Accounting Problem 1. solved in class. On Dec 2010, McKay Company paid 1,200 euro for the January insurance coverage. No adjustments have been made to the Prepaid Insurance account and it is now December 31, 2010. Prepare the journal entry to show the expiration of the insurance as of December 31, 2010

Accrual Accounting Problem 2. solved in class. Taylor company has received in December 2010, 1800 euro for consulting services. Half of them for this year and half of them for the next year. Prepare the T accounts for the above transactions.

Accrual Accounting The use of Work sheet The work sheet is an internal document not used from external decision makers. It is sometimes used to record the adjustments like the ones we discussed earlier in the lecture It includes a listing of the accounts, their balances and adjustments, and their sorting into financial columns. Demonstration example page 176 for showing in practice the use of work sheet.

Completion of the accounting Cycle The closing process is an important step at the end of an accounting period after financial statements have been completed. It prepares accounts for recording the transactions of the next period. In the closing process we must (1) Identify accounts for closing (2) Record and post the closing entries, (3) Prepare a post-closing trial balance.

Completion of the accounting Cycle The purpose of the closing process is twofold. First, it resets revenue, expense, and withdrawal account balances to zero at the end of each period. This is done so that these accounts can properly measure income and withdrawal amounts for the next period. Second, it helps in summarizing a period's revenues and expenses.

Completion of the accounting Cycle Temporary and Permanent Accounts Temporary (or nominal) accounts accumulate data related to one accounting period. They include all income statement accounts, withdrawal accounts, and Income Summary. They are temporary because the accounts are opened at the beginning of a period, used to record events for that period, and then closed at the end of the period. The closing process applies only to temporary accounts

Completion of the accounting Cycle Permanent (or real) accounts report on activities related to one or more future accounting periods. They carry their ending balances into the next period and include all balance sheet accounts. Asset, liability, and capital accounts are not closed as long as a company continues to own the assets, owe the liabilities, and have equity. Exhibition Example in the class page 193, ex 5-1

Closing The Ledger a/cs We have seen so far how we record the transactions to the accounts. But what is the exact amount in each account to be transferred in the Balance sheet and Profit & Loss? We transfer the closing balance of each transaction to the Financial statements. We will demonstrate this theory with the following example

DETERMINING THE BALANCE OF A T ACCOUNT The balance of a ledger account is the difference in Euro between the total debits and the total credits in the account. If the debit total exceeds the credit total, the account has a debit balance. If the credit total exceeds the debit total, the account has a credit balance. Lecturer: Elena Antoniou

Discussion question 3 J Jones started business on 1 March 2010 with 5,000 cash at bank and 1,000 cash in hand. During March the following transactions took place: March 2 Bought office furniture 1,500 by cheque. 5 Paid cash 500 for the purchase of additional office furniture. 11 Received cash 100 from the sale of furniture. 17 Sold furniture 300 to S Smith on credit. 22 Bought furniture valued £2,000 from A Adams on credit. 25 Received 200 by cheque from S Smith. 28 Paid 1,600 to A Adams, by cheque. REQUIRED Enter the above transactions in the books of J Jones and close the accounts

Closing the accounts and Financial Statements On 1 January 2011 Andrei Ltd had a cash balance of ₤3500, a bank balance of ₤8000 and equity 11500. The following transaction took place during January Jan 3 Paid telephone €200 by cash Jan 4 Provided consulting services to David for € 3000 Jan 13 Bought a used car for € 2000 by cheque Jan22 Received a cheque from David € 2000 Jan28 Paid Rent € 250 by cash Require Open the accounts on 1 January 2011 Post the transactions Close the accounts Prepare an income statement and a Balance sheet